Monthly Archives: February 2010

A couple of weeks ago, I was privileged to be a guest for a breakfast with Valerie Jarrett, senior advisor and confidant to President Obama, while she was traveling through the Seattle area. Planning for her travel, Ms. Jarrett’s staff proactively reached out to Northwest executives and organizations to meet and discuss our challenges and ideas.

And Valerie did something remarkable: She listened. Her breakfast offered an important lesson for those of us in the media industry whose job is primarily around broadcasting our message to the masses: to listen truly and deeply to reality as it is, rather than how we want it to be.

On dozens of different topics, Valerie Jarrett took in every word, whether it came from supporter or critic. She demonstrated (in a perception-is-reality sort of way) that every voice she heard was bringing her not only perspective, but potential solutions. She pressed each opinion to understand it and to ask — directly — for the best ideas. She demonstrated she was taking those proposals to heart, and moreso, and taking them back with her to the White House to do the most important thing – take action.

The challenges facing the Obama administration are great: the fatigued healthcare initiative; the burden of extreme deficits; and a public that has been increasingly losing faith their change agent. And after seeing this inner-circle advisor open her eyes, ears, and arms to criticisms and solutions, I walked away inspired with the sense that they have a good shot of figuring it out.

And acting. The thing with listening is that it’s only useful if you actually do something with it — and she did. A favorite example from the morning: When Ken Myer offered an idea for the White House to host a robotics competition on the south lawn as a symbol of the importance of science education, Ms. Jarrett said right on the spot that she’ll make it happen.

Back in the media industry, how many executives make the time to meet with our constituents — both our supporters and our critics — just to hear what’s on their minds? Even moreso, how many of us really listen when we have the chance? What impressed me most about Valerie Jarrett was that whether they flattered her positions or not, she wanted to hear reality from every perspective, and embrace solutions.

Too often in our changing media industry, leaders aren’t facing the brutal facts, much less acting on them. We are facing rapid shifts in the way content is consumed and what advertisers want for their dollar. And what many publishers are doing is the opposite of action: it is hiding.

There is hope. I loved reading Kara Swisher’s account of how Carol Bartz hosted her most vocal critic in the company cafeteria to share her Yahatred openly with 600 employees. Summoning the beast to the inner sanctum was a clear statement to executives and employees to listen to their critics and hear challenging perspective, to take it seriously, and most importantly to act on it.

But at the same time, some old media companies just don’t want to hear it. I frequently see first-hand and hear stories from friends of how the biggest and oldest media companies are ignoring reality. One of the most striking examples was at last week’s breakfast. Frank Blethen, Publisher of the Seattle Times stood up and said into the microphone: “Contrary to popular belief, the newspaper business model is sound.” He might be the only person in America who thinks so. And if he does have the secret to solving the newspaper publishing mess, he must not be sharing it. But more than likely, he’s hard of hearing. Instead of openly listening for solutions to stabilize the business in the face of declining circulation, pages, and advertising, he is in denial. Too many from the biggest and oldest media companies are ignoring reality — and the results will be fatal for them.

For the future of our industry, may we be challenge ourselves to listen like Valerie Jarrett and Carol Bartz. Let’s bring in the toughest critics. Let them loose and have them take their toughest shots. For us, we can thicken our skins to take it, and be better for it. Focus on the criticism that makes us cringe, and use it to inspire new solutions. The more we see and hear reality – the more we invite it into our cafeterias for breakfast or lunch, listen to it, and ask it for ideas, the sooner we can innovate our way to success.

ABC has begun today the process of restructuring its news operations, indicating planned layoffs of 300-400 employees. The six-point memo from ABC News President David Westin presents the changes as an overhaul of how the network produces news to match the “revolution in the ways that people get their news and information.”

But what we need now is a revolution in how content is created, not just in how it’s consumed. The real value isn’t in production efficiency for its own sake, and I’m surprised Westin missed the opportunity to define how ABC News can use this restructuring as a weapon to not just serve but grow audiences.

Yes, the changes will help ABC be more competitive on the cost side of the business by shifting the workforce into more flexible (and overall, far fewer) roles — doing more with less. Taking advantage of digital technology, the news industry no longer needs as many specialty roles to manage equipment and content. The technology is so much more accessible, portable, and efficient now that an it can all be at he fingertips of a single content creator.

Well beyond cost reduction, however, a vision of a more flexible workforce has real implications for audience — which is far more important of a lever on ABC’s business. If ABC can reduce the size of its working units, and evolve them to be more flexible to deploy, it should translate into the network being able to cover more stories, sooner, deeper, and better than competitors.

Additionally, if ABC can maintain its quality level of reporting in the new structure (and I think the news network should be and is deeply committed to doing so), it can scale its operations up this way, two ways: both with its own proprietary content, but even more interestingly, allowing it to integrate third-party and user-sourced content into the conversation.

The upcoming layoffs and restructuring will be painful, but this action is a sober and proactive recognition of the changing rules of the game. And if ABC executes right, it may not only be able to position itself as a leader of the new game, but to even establish some of the new rules of play. They certainly are indicating the right orientation to guide them: it is all about the audience.

Simon Dumenco wrote at AdAge this week about the billionaire benefactors of old media: the Sulzbergers, Rupert Murdoch, Bruce Wasserstein, Sam Zell, John R. MacArthur, and more. He laments their aging, and in a subhead asks “where’s the next generation of Richie Riches willing to take losses on worthy media properties?”

It’s easy to take a melancholy view that the good old days of media are behind us. But “who wants to take a loss?” is the wrong question. Let’s get real: The future of media had better not be about finding philanthropists to fund it. It needs to be about creating successful businesses. Those successful businesses will create wealth, not consume it, when they deliver content and experiences that are worth paying for by advertisers and consumers alike.

So who are these emerging emperors of the digital media age so far?

Steve Chen & Chad Hurley – YouTube defied the idea that media is created in publishing houses. It’s a liquid marketplace for video content that consumer can’t get enough of as evidenced by 20 minute average visits. To do that, they’ve merged content created by consumers, entrepreneurs, and media industry alike. While it hasn’t proven to monetize yet on-site, the concept alone was rewarded with a $1.65B purchase.

Mark Zuckerberg – Facebook reaches over 100 million per month in the U.S. alone, and is an addictive communications medium by which we connect to the world around us. Mark redefined content so broadly that it now includes anything anyone would want to share – whether it’s personal photos or articles or games or brand experiences.

Biz Stone and Evan Williams – Twitter has become the de facto network for propagating fresh content among distributors. It plays a major role building audiences not only for itself but for every other media property.

Steve Jobs – Apple has redefined the music industry and remade the consumer experience of music. By changing how music, video (more recently), and book (soon) content is consumed, Jobs has exploited consumers’ love of experience: it’s not just the content that matters, but how we consume it.

Jeremy Stoppelman – More than anyone else, Yelp has successfully merged the notions of community and content: and in the process, they have created the most successful example of a local content empire without an empire’s worth of payroll expenses.

Mark Pincus – Zynga has redefined media consumption by creating games in the social networks, and by moving well beyond advertising to get revenues. Mark has literally created a new category of media.

Each one of these figures has created a new model that matches the digital age. And, in fact, every one of them has done it by breaking with traditional publishing to interleave content and consumption so that they are inseparable.

That interactivity of content and consumption is a defining difference between the new world of media and the falling empires of legacy publishing. Those who master the synergy between their audience and their content can transform their consumers into far more than just a target for advertising: their audience participates in building the empire itself.

It’s now abundantly clear that the ad model isn’t enough to support the New York Times’ online future—the company needs consumers to help pay the bills. Thus, its recent decision to go metered. But the plan to charge some subscribers is not the end solution, it’s more like one piece of the puzzle. The company needs to take a few other big steps to help ensure the financial viability of NYTimes.com.

To be fair, let’s start with the three things the NYT got right with its decision, before we look at three things it still needs to do. You can see the upsides of the metering decision more clearly when you actually crunch the numbers on how the new system will impact existing revenues and look more deeply at the costs of implementing other types of subscriber plans.

1) Preserving advertising revenue. As a public company, the last thing the Times Company can afford to do now is shrink its existing online revenues.

A freemium model with a cap of, say, 20 articles per month lets the NYT retain up to 50 percent of its ad impressions (based on Quantcast data)—but most importantly, the company is preserving the most valuable impressions. (Light users are actually more valuable per pageview since they don’t exceed frequency caps.) By always allowing access to premium pages like the home page and section index pages, the most lucrative placements on the site will be served to every reader.

And by maintaining open access to casual users, NYTimes.com can preserve its eight-figure reach, which is critical to winning deals from top advertisers and commanding a high price premium. (Had they gone members-only, even with equivalent subscription numbers to the Wall Street Journal’s 400,000, the NYT’s rank would plunge to #2,000 as a web publisher—hardly enough reach to matter.)

Bottom line: With this approach, the NYT will likely retain 80 percent to 90 percent of current ad revenues.

2) Segmenting customers. Every marketer knows the way to maximize customer revenues is price discrimination, charging different (and the maximum tolerable) rates for each customer. Currently, the New York Times (NYSE: NYT) scores a zero here: Content is free for every user.

The ideal program charges each person exactly what he or she’d be willing to pay. A metered system isn’t perfect, but it’s far better than the TimesSelect model, which according to my analysis cost the NYTimes.com half of its online revenues while alienating readers who weren’t going to pay much, if anything, anyway.

In this way, the metering plan helps create a smart foundation: A configurable platform supporting dynamic offers that will tap those willing to pay more to get more.

3) Fine-tuning the advertising-revenue/subscription-revenue mix. A paywall that cuts off the existing online revenue stream—even just temporarily in order to build subscriptions—would mean nearly tripling the holding company’s $40 million annual operating loss (see Excel modelhere). Even if the NYT were outstanding at converting users, this public company can’t stomach the interim revenue hit. If the NYT converted 3 percent of its monthly audience (similar to WSJ ratio) over three years it would suffer a quarter-of-a-billion dollar cumulative loss—and still not be in the black.

By implementing a metering system that is flexible and tuneable, rather than a straight paywall, the NYT will be able to turn the dials as needed. Quick test-and-iterate cycles will let them optimize the meter settings without jarring the advertising dollars they depend on. In a strict paywall, it would have to make the switch with its eyes closed and fingers crossed.

But these three accomplishments just aren’t enough. What the Times really needs to do is adopt a whole new architecture for its digital business. In particular, the goals should be to develop compelling new kinds of content, new experiences and new offers. These are the sorts of moves that will generate huge interest and huge premiums, and they result from discontinuous, not incremental, thinking.

How will we know when NYT has summoned the courage? We will be looking for these signs:

1) Acquisitions. What new products, business models, and accelerators can the Times add to its portfolio to create discontinuous innovation? Nothing says “strategic change” like M&A, and the NYT signaled its digital directive in 2005 by buying About.com for $410 million, shocking everyone at how deadly serious it was about building digital capability. Now it’s time to acquire sites like Associated Content or Mahalo to build a new, scalable sourcing model for additional non-premium content to supplement its top-tier journalism; or blog networks like Gawker to enter new vertical categories and gain experience with new labor models.

2) Product and content offering. The NYT is a premium media property. What new premium content and products can it offer to coax new consumer spending? While the NYT has explored many new ways to readandinteract with the paper’s content, the desperate straits call for more dramatic action: reinventing the whole publishing model—lest otherpublishers and device manufacturers get there first. Each new and innovative experience is a chance to lead the revolution as well as a premium revenue opportunity.

3) Talent. The innovation needed at the Times is unlikely to come from inside its headquarters. What outside talent can it bring in to orchestrate major progress, beyond putting aninsider in charge of the new metered model? Erik Jorgensen and Scott Moore helped MSN break out of its rut with a whole new home page that weaves social media into the content experience. Jimmy Pitaro at Yahoo (NSDQ: YHOO) is demonstrating that he can create bold new programmingfor users. And Bill Wilson at AOL (NYSE: AOL) has created over six-dozen content destinations—and a marketplace for content—in his MediaGlow unit. These are the types of break-the-status-quo thinkers that could help Martin Nisenholtz bring the Times to find a new way.

And one final thing. Speed.

The NYT’s approach to the radical change in its business is anything but radical. It’s careful, considered, and incremental, and it’s missing an essential ingredient: speed. Breakthrough change doesn’t happen slowly.

In this era of “launch and learn,” it is a big mistake to wait until January 2011 to launch the new approach, as the company has said it will. Sure, technology needs to be built to handle subscription database ties, but that development can and should be done fast. The goal should be to deploy the system in 90 days and then tune the dials on the fly, developing and testing multiple products and offers to increase user spend. Every month they wait, another 12,000 subscribers may flee the core print business (based on its recent six-month circulation decline).

In the end, the challenge for the New York Times is not about consumer-payment mechanisms. The real challenge is to build something so great that consumers fall in love—and their credit card will be the surest sign of their devotion.

But just how much did it lose? No one seems to have put figures to it yet.

While the NYT lauded the $10MM in annual revenue that the program created, what they didn’t mention was the cost. Based on traffic rebounds of 65% once the TimesSelect program was cancelled, the TimesSelect program cost NYT one-third of its traffic and likely almost as high a fraction of the site’s revenue.

At today’s monetization rates of $75 RPM (imputed from their Q3 2009 financials) on the 62MM suppressed pageviews of their traffic at the time, that’s making $10 million at the cost of $56 million a year. (Or maybe even more than that, as ad rates have fallen since then. If anyone has then-current CPM estimates for NYTimes.com, please leave me a comment.)

Relative to today’s estimated $110MM topline for NYTimes.com online ad revenues, that is a hefty price to pay at 50% of revenues.

Clearly, that was a subscription program gone wrong.

The stakes are high. This time, it’s no wonder NYT will need to take care to optimize take rates and retain advertising revenues.